Gold’s day in the sun is over: CIBC

Gold's lustre will fade – CIBC

CIBC World Markets is predicting that gold prices will continue to fall as the fear of inflation is rooted in a fundamental misunderstanding of monetary policy.

“Gold will have its day in the sun at other points down the road, but the clouds on the horizon could portend still lower gold prices over the next couple of years,” economists Avery Shenfeld and Emanuella Enenajor wrote in a report, suggesting gold could slide to $1,500 an ounce over the next two years.

The yellow metal’s surging popularity has seen it appreciate by nearly 500% between 2002 and today. However, CIBC believes many of the forces that made bullion so attractive appear to be turning over, while expectations for other supportive factors are overdone.

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The economists point out that CPI inflation has essentially vanished, both in the United States and across the developed world.

“Neither measures of economic slack, which is still in abundant in the US, Europe and Japan, nor wage pressures, give any hint of inflation,” they said. “So why would anyone be worried about it?”

The economists believe investors have piled into gold as a hedge by incorrectly buying into the myth that the U.S. Federal Reserve, the Bank of Japan and the ECB have been printing so much money that inflation is inevitable.

“A myth because, in reality, money growth has not been particularly brisk,” CIBC said, noting that the Fed does not buy bonds through money printing. Rather, it takes bonds in exchange for crediting the selling bank’s reserve deposit at the Fed. These $1.5-trillion or so in reserves are not money and do not count in the money supply, the economists explained.

CIBC sees more validity in the argument that the United States may choose to let prices surge as a means of inflating away its massive debt. However, the economists noted that history points to another outcome. In prior periods of major deleveraging (1945-1970, 1995-2000), both of which saw historically low rates of GDP inflation, the U.S. relied on taming the debt itself. Current budget negotiations appear to support that as the likely course of action.

For investors holding gold as an alternative to the U.S. dollar, in anticipation of the greenback falling sharply, CIBC noted that the U.S. current account deficit is primarily due to the trade deficit in petroleum products, which is shrinking.

The economists also highlighted the return of central banks as net buyers of gold, they noting that the surging popularity of ETFs among private investors has brought these holdings to more than 2,500 metric tonnes, approaching those of the IMF.

Both ETF gold purchases and non-commercial long positions on the Comex peaked in 2009 as investors sought an alternative to equities following the recession’s crash.

“Note that since then, while ETFs have still been strong net buyers, the volumes haven’t been sufficient to sustain the upward price momentum,” the economists said. “The ETF stockpile, and to a lesser extent, long positions in futures markets represent a significant risk of a pullback in gold, should investors decide that their money would do better elsewhere.”

CIBC believes the Fed will pull back from quantitative easing late in 2013 and start to talk more about upcoming interest rate hikes in the second half of 2014. The economists noted that expectations for rate hikes in 2015 will push up bond yields, raising the opportunity cost of holding a bar of gold with a zero yield.

They also expect improving global growth prospects for 2014 will drive another leg up for equities.

“One reason why gold seems to have plateaued since mid-2011 is that some investors are looking with envy at improving returns in the stock market,” the economists said.

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